Big bank economists have chopped their rate-hike forecasts again. TD made the biggest adjustment earlier today. It slashed its 2011 year-end overnight rate estimate by one whole percentage point. This underlines how dramatically expectations can change in just a few short months.
On average, major economists now expect a 150 basis point increase in the overnight rate over the next 16 months. Their outlooks, if accurate, imply a 4.25% prime rate by December 31, 2011. Prime rate is currently 2.75%.
Based on a 70 basis point average discount from prime, this suggests 5-year variable rates in the 3.55% range by year-end 2011. That's lower than today's typical discounted 5-year fixed rate.
As for the next rate hike, the signals are mixed. Canadian bond dealers are all expecting a 1/4 point increase at the Bank of Canada's September 8 rate meeting. The financial markets, however, are pricing in just a 30% probability of a hike.
After the next rate increase, most analysts now seem to expect the BoC to pause for a while. "The coming policy pause could now easily last a year," says BMO.
Fixed-Rate Mortgage Forecast
Banks foresee 5-year bond yields climbing 127 basis points in the same 16-month time frame. That would put the 5-year yield at 3.41% by the end of next year.
Assuming a typical 120 basis point spread above yields, this suggests deep-discounted 5-year fixed rates could rise to roughly 4.61% by year-end 2011.
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